Reinhart and Rogoff's Theory of Government Debt is Dead
Carmen Reinhart and Kenneth Rogoff wrote a wildly influential book four years ago called This Time Is Different.* The thesis of the book is that when a government has a debt-to-GDP ratio above 90 percent, it is terrible for economic growth. The authors also followed up with a couple of papers arguing the same thing. Pro-austerity forces here and elsewhere in the world have seized upon the book to push their favored policies.
From the beginning, the paper was met with extreme skepticism among the left. The theory could have gotten the causation backwards: perhaps low growth drives high debt, not the other way around. The theory also seemed hard to understand within any macroeconomic frame. It would follow from it that a government that holds assets instead of selling them to reduce debt somehow caused growth to decline, which is just a very confusing idea. The conceptual problems could iterate on and on.
Beyond those problems, other researchers also had a hard time replicating their results, and Rogoff and Reinhart would not release their data. It turns out that the reason researchers had a hard time replicating their results is because the results were just wrong. Three researchers from UMass Amherst—Thomas Herndon, Michael Ash, and Robert Pollin—just released a paper that explains, among other things, that the spreadsheet Rogoff and Reinhart used for their calculations had basic coding errors. In one case, the spreadsheet averages the wrong cells, leading them to conclude that growth among countries with high debt-to-GDP ratios averaged -0.1 percent. When this basic spreadsheet error was corrected, the growth rates in these high dept-to-GDP countries actually averaged 0.2 percent.
Beyond that, Reinhart-Rogoff excluded some years from their data set, and weighted averages by country instead of by year. So 20 years of solid growth in a high debt country could be wiped out by 1 year of bad growth in a high debt country because instead of adding all the years together and dividing by 21, they add the average of the 20 years of growth to the 1 year of bad growth, and divide by 2! It's a mess.
For those in policy circles, it is hard to understate how big a deal this actually is. Pro-austerity forces obviously have separate motives for why they want to bring on the economic pain that has nothing to do with Reinhart and Rogoff. But for the last few years, this research has been providing the pro-austerity crowd intellectual cover for their policy preferences. Everywhere you turn in these debates, you are bombarded with Reinhart and Rogoff. While there were plenty of good reasons to dismiss their theory before now, the fact that their own data—when corrected for basic coding—cuts against them should officially render this theory dead. It is simply not the case that a government with a debt-to-GDP ratio over 90 percent is a death sentence for economic growth. Reinhart and Rogoff were wrong even on their own terms.
CORRECTION: An earlier version of this post misidentified the title of Carmen Reinhart and Kenneth Rogoff's book as "Growth in a Time of Debt." This is the title of a related working paper.
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